High Court to Hear Truck Drivers’ Challenge to Employer’s Bankruptcy Dismissal

Justices will review case concerning scope of bankruptcy court's authority to deviate from code's priority schedule.
The Supreme Court will hear an appeal brought by laid-off truck drivers whose employment-related claims weren't included in the settlement and dismissal of their former employer's Chapter 11 bankruptcy case.

The drivers were laid off at the time their employer, Jevic Transportation Inc., filed for bankruptcy. The drivers filed a class-action complaint against Jevic and a firm that purchased the company, alleging that they violated the Worker Adjustment and Retraining Notification (WARN) Act by failing to provide the drivers with 60 days of written notice prior to a mass layoff.

The drivers claimed that the bankruptcy court approved a settlement of Jevic's bankruptcy case that impermissibly excluded their claims while including the claims of unsecured creditors with a lower priority under the U.S. Bankruptcy Code.

The 3rd U.S. Circuit Court of Appeals ultimately upheld the bankruptcy court's decision. The company's financial situation was grim, and there was little chance of a successful Chapter 11 reorganization plan. Thus, the drivers likely wouldn't have received any funds, even if the settlement and dismissal hadn't been approved.

The drivers asked the Supreme Court to rule on whether a bankruptcy court has the authority to approve a settlement distribution that deviates from the code's priorities.

Significance for HR Professionals

This part of the case involves a pure bankruptcy issue, said Jack Raisner, an attorney for the drivers with Outten and Golden in New York City. Still, employers "must be mindful of WARN Act notice—and all employee pay issues. If this company, Jevic, had complied with WARN, it would not have given rise to a group of unhappy creditor employees down the road."

"The state of the law under the Bankruptcy Code has always enabled corporate debtors to say 'no' to outside creditors who seek to intercept funds that represent the earned wages of the company's employees," Raisner said.  

"In other words, the automatic benefits of honoring the priority code is that the company, in safekeeping those funds for employees, is both complying with federal law and in turn being loyal to its employees," he added.

Raisner said companies that have a wage priority rule to rely on are better able to preserve their relationships with their stakeholders.

Bankruptcy Code Sets Priorities for Repayment

Jevic, a New Jersey-based company, was purchased by private equity firm Sun Capital Partners through a leveraged buyout after it began experiencing financial difficulties in 2006. Unable to improve its financial situation, the company filed a Chapter 11 bankruptcy petition in 2008.

An employer will typically file either for reorganization under Chapter 11 or liquidation under Chapter 7. A Chapter 11 reorganization involves a plan to sell company assets and repay creditors with the goal of continuing normal business operations while resolving financial issues.

Under a Chapter 7 liquidation, however, the company is generally dissolving the business, its assets are sold, and its creditors are paid according to the priorities established by the bankruptcy code.

Secured creditors have the highest priority for repayment under the code, and employees who are owed wages are given a higher priority than unsecured general creditors.

'The Least Bad Alternative'

Jevic owed about $53 million to Sun Capital and a group of lenders led by CIT Group/Business Credit Inc. Both firms held a first-priority lien on most of the company's assets.

Jevic's dire financial situation gave it little chance for a successful reorganization under Chapter 11. Even if the case was converted to Chapter 7 liquidation, the company only had $1.7 million in cash to distribute to its creditors, and Sun Capital had a lien on those funds.

The drivers estimated their claim to be worth about $12.4 million, including an $8.3 million priority wage claim under the bankruptcy code.

The bankruptcy court ultimately approved a settlement through which Sun Capital agreed to assign its lien on the $1.7 million in remaining assets to a trust that would first pay tax and administrative creditors and then pay general unsecured creditors.

The drivers objected to the settlement because it didn't include their claim even though it provided payments to creditors with a lower priority under the bankruptcy code.

The bankruptcy court found there was "no realistic prospect" of a "meaningful distribution" to any of the company's unsecured creditors unless the settlement was approved.  

The U.S. District Court for the District of Delaware and the 3rd Circuit affirmed the bankruptcy court's ruling.

"The record is not explicit as to why the settlement did not provide for any payment to the drivers even though they held claims of higher priority than the tax and trade creditors' claims," the 3rd Circuit said.

However, "absent a showing that a structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion processes, a bankruptcy court has discretion to order such a disposition," the federal appeals court said.

Calling this case a "close call," the 3rd Circuit said the bankruptcy court's decision was "the least bad alternative" because there was no prospect of a Chapter 11 plan being confirmed.

Drivers Ask Supreme Court to Review

The truck drivers asked the Supreme Court to weigh in on the bankruptcy court's scope of authority.

In their petition for review, the drivers argued that the bankruptcy court impermissibly decided that a settlement that violated the code's priorities was preferable to no settlement at all.

The drivers pointed to a 5th Circuit ruling that conflicts with the 3rd Circuit's decision. They argued that the 5th Circuit correctly ruled that all "distributions of settlement proceeds in a bankruptcy case (absent consent) must comply with the code's priority scheme."

The case is Czyzewski v. Jevic Holding Corp., No. 15-649, review granted June 28.

Lisa Nagele-Piazza, SHRM-SCP, J.D., is the senior legal editor for SHRM. 

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